In the land of credit, cash is king

But more con­sumers are buy­ing with cards

Finweek English Edition - - Companies & Markets - ANDILE MAKHOLWA andilem@fin­week.co.za

AN­A­LYSTS SAY THERE SEEMS to be a gen­eral aver­sion to credit buy­ing dur­ing an eco­nomic slow­down, with con­sumers pre­fer­ring to buy with what they al­ready have than spending on what they don’t.

Al­though re­cent re­sults of ap­parel re­tail­ers seem to re­flect that some an­a­lysts feel the fig­ures might be mis­lead­ing as many con­sumers buy with their credit cards.

Quin­ton Ivan, port­fo­lio man­ager at Corona­tion Fund Man­agers, says the pro­lif­er­a­tion of credit cards by banks be­fore the en­act­ment of the Na­tional Credit Act is one of the rea­sons for the in­crease in cash sales, as buy­ing with a credit card is re­flected as a cash sale in fi­nan­cial state­ments.

The proof is in the pud­ding. Cash value re­tailer Mr Price re­cently re­ported re­tail sales growth of 19,3% to R8,6bn for the year ended March 2009 (with cash sales con­tribut­ing 84%) while credit-ori­en­tated group Fos­chini’s re­tail sales were up only 5,5% to R8,1bn (credit sales 62%) over the same pe­riod.

Un­listed Ed­con’s re­sults for the year ended March 2009 show the group – whose brands in­clude Edgars, Jet and Le­git – grew re­tail sales by 9,4% to R22bn, with credit sales ac­count­ing for 52%.

“The re­sults shown by Mr Price in­di­cate cash re­tail is gen­er­ally per­form­ing bet­ter than some of its credit re­tail peers,” says Zahira Os­man, in­vest­ment an­a­lyst at Afena Cap­i­tal. “Within the Fos­chini Group the re­sults also point to bet­ter cash sales – cash sales for the full year were up 10,7% com­pared with 2,5% for credit sales, though its sec­ond-half per­for­mance saw some re­cov­ery in credit sales (growth of 4,8%).”

Ivan also notes that cash is out­per­form­ing credit. “That’s a sign of a dis­tressed con­sumer who is mind­ful of tak­ing on fur­ther debt. Con­sumers have less dis­cre­tionary in­come as a re­sult of high inflation and in­ter­est rates and are thus more dis­cern­ing. That ben­e­fits re­tail­ers such as Mr Price.”

In gen­eral terms, peo­ple “in­stinc­tively” tend to use more cash and less credit in a re­ces­sion­ary en­vi­ron­ment, says Chris Gilmour of Absa As­set Man­age­ment Pri­vate Clients. How­ever, he says credit buy­ing will pick up when the eco­nomic cy­cle turns. “There al­ready ap­pear to be nascent signs that con­sumer spending is im­prov­ing, es­pe­cially from the fur­ni­ture re­tail­ers’ per­spec­tive,” says Gilmour.

In the re­sults un­der re­view, Mr Price re­ported an in­crease of 16% in di­luted head­line earn­ings per share to 244,6c from 210,8c in the pre­vi­ous year. The group de­clared a fi­nal div­i­dend of 92,8c/share – an in­crease of 16,7% against the pre­vi­ous year.

Fos­chini’s di­luted head­line earn­ings per share were marginally up 2,8% to 553c/share for the year ended March 2009, but the group de­clared a fi­nal div­i­dend of 170c – the same as last year.

How­ever, an­a­lysts are in cho­rus that the re­sults were bet­ter than ex­pected in the cur­rent down­turn, with Ivan say­ing both Fos­chini and Mr Price shares are at­trac­tive buys.

Un­for­tu­nately, re­tail in­vestors don’t have the op­tion of in­vest­ing in Ed­con, which op­er­ates in the pri­vate eq­uity sec­tor. How­ever, in­dus­try play­ers state that might change in fu­ture.

An­a­lysts at McGre­gor BFA are fore­cast­ing earn­ings per share to in­crease from 277c to 335c/share and 625c to 758c/share for Mr Price and Fos­chini re­spec­tively in the up­com­ing two years. Div­i­dend prospects also look good, with div­i­dend per share fore­cast to in­crease from 153c to 186c/share for Mr Price and 315c to 382c/share for Fos­chini for their cur­rent and next fi­nan­cial years re­spec­tively.

The risks in­volved in in­vest­ing in re­tail­ers that of­fer an el­e­ment of credit are the ex­po­sure to bad debt. But it’s worth not­ing bad debt was man­aged by both Mr Price and Fos­chini, with the lat­ter re­port­ing a mar­ginal net bad debts in­crease of 8,7% as a per­cent­age of its debtors book, while Mr Price’s bad debts dropped from 8,6% to 6,6% – a sit­u­a­tion that may mean Fos­chini turned away more po­ten­tial cus­tomers, says Gilmour, and Mr Price plac­ing more em­pha­sis on its cash busi­ness.

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